Company Overview: With sales exceeding $5 billion and a listing on the New York Stock Exchange, this KTP client is primarily engaged in the manufacture of automotive emissions control and ride control products and systems for both the original equipment market and the aftermarket. The company is headquartered in the Midwestern United States and employs approximately 14,000 people.
Plan Design Summary: Prior to the new plan design and structure, the company maintained a defined benefit plan and contributed approximately 85% of the plan costs. KTP created Retiree Benefit Solutions© that meet the company’s goals of:
- Reducing the FAS 106 liability and lowering cash expenses, thereby boosting corporate profits
- Curtailing the risks of the existing self-funded retiree medical program
- Minimizing the impact on the retiree population
Results: By establishing a separate legal entity to govern the plan and by outsourcing the administrative functions, KTP was able to move the company to a partially-insured, declining defined-contribution model that eliminated all the financial exposures of the self-funded plan (healthcare cost trends, catastrophic losses, etc.) and greatly reduced the financial burden on the company.
KTP created a detailed financial analysis illustrating the likely impacts of various plan changes on the client’s financial statements and stock performance. Under the new plan design, the FAS 106 liability on the company’s balance sheet dropped by approximately $70 million and operating income improved by approximately $12 million per year. Roughly $5 million of these savings resulted from reduced cash expenses and another $7 million resulted from lower FAS 106 amortization costs.
The stock chart below highlights the stock market’s reaction to the changes in the retiree medical plan. By the end of the first day of trading following the announcement, the company’s stock closed up $0.90/share or 21.3% and continued to rise another $0.35/share the following day for a total share-price increase of 29.6% over the closing price the day prior to the announcement.
The following is a quote from the company’s second quarter earnings press release:
“The company also announced today a change to its retiree medical benefits program, which will provide participating retirees with continued access to group health coverage while reducing [the company’s] subsidization of the program.”
The following are quotes from the Second Quarter Earnings Conference Call:
The Chief Executive Officer stated, “We just announced a change to our US retiree medical plan to help insulate the Company from escalating medical costs. The program will continue to provide our retirees with a group medical plan option, while also fixing our cost at a lower level than our current contribution rate. Based on current estimates, the EBIT benefits of the revised plan are expected to be about $12 million, that’s $12 million annually, beginning in the third quarter.”
When asked by an equity analyst on the earnings call about the possible execution risk of changing the retiree medical plan, the CEO replied, “The mechanics are pretty straightforward; we announced the program, letters have been sent, and it’s basically done, so in terms of execution risk, there really isn’t any.”